Ag players at odds over RFS

The widespread drought's impact on corn yield and prices has livestock and poultry producers calling for a waiver of the Renewable Fuel Standard (RFS). The ethanol industry and reports from agricultural economists contend such a waiver would have smaller impact on corn prices than one might expect.

A bipartisan group of senators this week urged the EPA to waive the Renewable Fuels Standard (RFS) in response to livestock and poultry industry concerns about the widespread drought’s impact on corn yield and higher prices for corn used for feed. The RFS requires 13.2 billion gallons of corn-based ethanol to be produced in 2012 and 13.8 billion gallons in 2013.

This morning, USDA estimated that the 2012 corn crop and average yield will be down significantly. Average yield is estimated to be 123.4 bushels per acre (bpa), down about 23 bpa from USDA’s July estimate and the lowest yield since 1995, reported the Renewable Fuels Association (RFA). The USDA expects a harvested crop of 10.78 billion bushels (bbu), down more than 2 bbu from its July estimate. This would be the smallest corn crop since 2006.

“As stressful weather conditions continue to push corn yields lower and prices upward, the economic ramifications for consumers, livestock and poultry producers, food manufacturers and foodservice providers will become more severe,” the senators wrote in their letter to EPA Administrator Lisa Jackson. “We ask you to adjust the corn grain-ethanol mandate of the RFS to reflect this natural disaster and these new market conditions. Doing so will help to ease supply concerns and provide relief from high corn prices.”

“This summer’s hot, dry weather conditions have caused significant challenges for all users of grain,” responded Bob Dinneen, RFA president and CEO last week. “We understand the hardships facing the agriculture industry this summer are serious. From extremely poor pasture conditions to heat stress on animals to reduced crop yield potential, this summer’s circumstances have been difficult. However, waiving the RFS won’t bring the type of relief the livestock groups are seeking, nor will it result in significantly lower feed prices. In fact, because ethanol plants also produce a high protein feed, limiting ethanol production will only further complicate drought related feed issues and costs.”

Ethanol industry reducing production

Dinneen pointed out that the ethanol industry has already begun to respond to higher corn prices by reducing production. “Still, despite the downturn in production and continued demand rationing by the ethanol industry, obligated parties (petroleum refiners and blenders) should have no problem meeting the RFS,” he said. “The ability of obligated parties to ‘bank’ excess Renewable Identification Number (RIN) credits and use them for compliance in the following year provides a significant measure of flexibility that takes pressure off of the corn market in the event of a short crop. It is estimated that some 2.4 to 2.6 billion excess renewable fuel RIN credits are currently available to obligated parties, equivalent to nearly 20 percent of this year’s RFS renewable fuel requirement,” Dinneen added.

The RFA also pointed to a study by Iowa State University’s Bruce Babcock that found waiving the RFS would not have a meaningful impact on corn prices. The two main findings of this study were:

1.Flexibility built into the RFS allowing obligated parties to carry over blending credits (RINs) from previous years lowers the economic impact of a short crop. The 2.4 billion gallon amount of flexibility assumed in Babcock’s study lowers the corn price impact of the ethanol mandate in this drought year from $1.19 per bushel to $.28 per bushel. “This means that relaxing the mandate further would have modest impacts on corn prices.” Babcock stressed that the result is conditional on the distribution of corn yields used in the study. If yields turn out to be much lower than assumed, the impact of the mandate would be greater.

2.“If the current price of ethanol relative to gasoline accurately reflects the value of ethanol to blenders, then the price of ethanol will be supported at quite an attractive level as long as ethanol quantities are not pushing up against the blend wall. This implies that ethanol plants will be a strong competitor for corn even without a mandate,” Babcock reported. In a no mandate simulation, ethanol production dropped by just 600 million gallons. Babcock pointed out that the 600 million gallon drop in supply is enough to raise the value of ethanol to support 12.3 billion gallons of production and continue high corn prices. “The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped,” Babcock noted. For more information, please visit http://www.card.iastate.edu/publications/dbs/pdffiles/12pb7.pdf